The Battle Over Carried Interest: Why This Tax Break Matters

On Thursday, President Trump dropped a bombshell: he urged Republican lawmakers to eliminate the carried interest tax break. This isn’t just another policy tweak—it’s a move that could send shockwaves through the venture capital (VC) world. Why? Because carried interest allows private equity and VC fund managers to treat their earnings as capital gains, taxed at a lower rate than ordinary income. For the startup ecosystem, this isn’t just a tax issue—it’s a lifeline.

“Carried interest encourages smart, high-risk investments in innovative high-growth startups.”

Bobby Franklin, President and CEO of the National Venture Capital Association (NVCA)

Why This Tax Break Fuels Innovation

Carried interest isn’t just a perk for wealthy investors—it’s the engine that drives high-risk, high-reward investments in cutting-edge technologies. Think AI, crypto, life sciences, and national defense. Without it, VC firms might think twice before betting big on the next big thing. And let’s be real: startups need that kind of bold backing to survive and thrive.

A Flashback to 2017: The Tax Code Shake-Up

This isn’t the first time carried interest has been in the crosshairs. Back in 2016, Trump campaigned on closing the “loophole.” But when the 2017 Tax Cuts and Jobs Act rolled around, the tax break survived—albeit with a twist. The holding period for assets to qualify for the capital gains rate was extended from one year to three years. For the VC industry, this was a win. Why? Because most venture capital firms hold onto investments for much longer than a year anyway.

“The 2017 Trump tax legislation kept venture investment flowing to emerging technologies. A change now will disrupt that progress and disproportionately harm small investors, especially in middle America.”

Bobby Franklin, NVCA

The Domino Effect: Who Stands to Lose?

If carried interest is repealed, the ripple effects could be massive. While the NVCA warns that small investors in middle America would be hit hardest, the reality is that the majority of VC dollars still flow from New York and Silicon Valley. Northern California, in particular, remains the undisputed king of startup funding. But make no mistake: this isn’t just a coastal issue. A repeal could stifle innovation nationwide, leaving startups scrambling for the capital they need to grow.

The Bottom Line: A High-Stakes Gamble

Repealing carried interest isn’t just about tax policy—it’s about the future of innovation. Will lawmakers pull the plug on a system that fuels high-risk investments in groundbreaking technologies? Or will they recognize the critical role this tax break plays in keeping the startup ecosystem alive? One thing’s for sure: the stakes couldn’t be higher.